Don't Give Up on This Yummy Stock

×

The market wasn't overly impressed with Yum! Brands' (YUM) quarterly report on Tuesday night.

Yum! is the company that watches over the Taco Bell, KFC, and Pizza Hut chains -- fare that's quite familiar to Americans. However, things haven't been going so well for these concepts here at home.

Comps -- the average revenue generated by a typical established eatery -- fell by 2% to 3% at each of its three chains. Yum! fared substantially better in China, with its popular KFC scoring a whopping 19% spike in comps.

However, even there analysts are giving Yum! only a passing grade. Wall Street's bigger concern is that the economy in general in China has slowed since the fiscal quarter ended in August.

Chinese Fried Chicken?

It's impossible to overestimate the importance to Yum! of KFC in China, which is now generating roughly 40% of the company's operating profits. However, between simply meeting Wall Street's profit targets, posting negative same-unit sales domestically across its three flagship concepts, and the general fear of investing in China, Yum!'s stock opened flat on Wednesday after Tuesday night's report.

Investors who want a pure play on quick-service dining in China can always turn to Country Style Cooking (CCSC), but there's nothing wrong with Yum!'s combination of steady stateside juggernauts with overseas expansion sizzle.

Yum! Is Tastier Than You Think

Foodies obviously aren't going to be raving about Yum!'s chains:

  • Pizza Hut's quality is no match for that popular family-run pizzeria in your neighborhood.
  • It will be hard to find less authentic Mexican fare than Taco Bell's at any nearby burrito roller.
  • KFC's namesake chicken holds up well, but why do the mashed potatoes taste like powdery astronaut food?

Well, Yum! Brands has never aimed to nab top marks on Yelp.com. Its strengths rest largely on convenience, consistency, and value. Knock Taco Bell all you want, but you're not going to find a cheaper quick-service outlet for your late-night taco craving.

A World of Food

Take a stroll through the buffet of restaurant stock offerings, and suddenly the offerings at KenTacoHut (my editor's shorthand for Yum!'s brands) seem a lot more appetizing.

  • Chipotle Mexican Grill (CMG) has been posting consistently positive comps -- and no one would swap a carnitas burrito at Chipotle for a Taco Bell chalupa -- but it trades at a heavy 35 times next year's earnings.
  • Papa John's (PZZA) easily wins taste tests in my home against Pizza Hut -- and it actually trades at a mere 13 times next year's net income forecast -- but it lacks Yum!'s Chinese kick.
  • As for Country Style Cooking, Yum! is also cheaper, fetching just 15 times next year's projected profitability. Country Style Cooking trades at 20 times next year's earnings targets, but analysts have also overestimated the chain's profit potential in each of the past three quarters.

Yum! also brings a respectable 2.3% yield to the table, giving investors drive-thru spending money as they wait for the stock to bounce back. Yum! is a proven globetrotter trading at a price that is as reasonably cheap as many of the items on its menus.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Chipotle Mexican Grill and Yum! Brands. The Fool owns shares of and has written puts on Papa John's International. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill, Country Style Cooking Restaurant Chain, and Yum! Brands.



Increase your money and finance knowledge from home

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Behavioral Finance

Why do investors make the decisions that they do?

View Course »

Add a Comment

*0 / 3000 Character Maximum